equalled the profit plan in local currency; thus, the negative variance shown in PC
must be fully attributable to currency factors. Indeed, the administrative expense in
PC is 10% below the profit plan, the result of local currency depreciation. In those
functions where the actual performance differed from the profit plan in LC, we have
to perform some variance analysis to separate the currency factor from one or more
operating factors. To illustrate this separation, we shall analyze the performance of
the marketing function (LC Company), which shows favorable variances of LC 135
and PC 54, respectively.
(c) Variance Analysis. Variance analysis can be made relatively simple, or it can be
extended to include detailed and sophisticated approaches, depending upon the re-
quirements of managements. For illustrative purposes, we use a relatively simple ap-
proach, which is explained in detail, while the more sophisticated methods are only
alluded to later in this chapter.
The two most common variances used by financial analysts are volume and price
variances. We need these to analyze both revenues and costs, and the method is the
same whether we deal with realizations or cost of sales. One way of arriving at a vol-
ume variance in revenues is to multiply the change in sales volume by the unit sell-
ing price of the base period. Similarly, when we wish to establish the volume vari-
ance arising out of costs, we multiply the change in cost volume by the base period’s
unit cost. The base period is the period against which we make our comparison, be it
the prior year, the prior month, or the profit plan.
To arrive at the revenue price variance, we take the change in selling price and mul-
tiply it by the current period’s sales volume. The cost price variance is computed sim-
ilarly; the change in unit cost is multiplied by the current period’s volume. It is more
descriptive to call the price variance, relating to cost of sales, a cost rate variance.
The foregoing variances give us the explanation as to what happened to the mar-
gin or gross profit realized in our business. In the simplest variance analysis, one
more aspect needs to be accounted for: expenses. The easiest method is to compare
25 • 14 MULTINATIONAL BUDGETING AND CONTROL SYSTEMSExhibit 25.10. Income Statement.
AFFILIATE B
Income Statement
Year Ended December 31, 20X0
LC PC
Actual Plan Variance Actual Plan VarianceBefore-tax income
Manufacturing 340 310 30 295 310 (15)
Marketing 360 225 135 279 225 54
Transportation 80 75 5 71 75 (4)
Administration (40) (40) (^0) (36) (40) 4
Total 740 570 170 609 570 39
Income tax (370) (285) (85) (185) (285) 100
Net income ____ (^370) ____ (^285) ____ (^85) ____ (^424) ____ (^285) ____ 139